--Long-Term Issuer Default Rating (IDR) at 'AA+';
--Senior unsecured debt at 'AA+';
--Short-Term IDR at 'F1+';
--Commercial paper (CP) program at 'F1+'.
The Rating Outlook is Stable.
Fitch also assigned an 'AA+' rating to Microsoft's
KEY RATING DRIVERS
The ratings and Stable Outlook reflect Microsoft's:
--Strong core software position: Microsoft Windows remains the primary operating system (OS) for servers and PCs, despite lackluster adoption of Windows 8 for PCs to date. Windows has approximately 90% share of the PC market and Windows-based servers accounted for 50% of total server revenue in the third quarter of 2013, according to IDC. Microsoft's Office is also the leading software productivity suite, particularly in the commercial market.
--Very strong liquidity: Liquidity is supported by nearly
Fitch projects Microsoft's FCF (post-dividends) will decline to
--Material Recurring Revenue: Approximately 50% of Microsoft's revenue base is recurring from long-term commercial licensing agreements.
--Highly Diversified Revenue Base: Microsoft's revenue base is diversified by end market with commercial and consumers representing 53.4% and 46.6% of total revenue, respectively, but the Devices and Consumer segment accounted for only 30% of segment operating profit, excluding corporate and other. The greater operating profit from the commercial business is significant because Fitch views Microsoft's consumer market as less defensible to competition from Apple and Google than the commercial business.
Fitch's credit concerns center on:
--Reliance on Windows and
--Competitive Threats to Core Business: Microsoft Windows competes with free or lower cost operating systems from Google in the tablet and smartphone markets (Android - 80% smartphone share) and in the notebook PC market (Chrome), primarily in the consumer and education markets, as traditional PC companies diversify their OS offerings beyond Windows in part due to Microsoft's release of its Surface tablet.
Google Apps, an alternative to Microsoft's Office productivity suite, is available for free to consumers, supported by advertising revenue. Google Apps for government, education and business costs less than Office for commercial users.
--Weak Consumer PC Demand: Windows and Office, with the exception of Office 365 (
--Pressure to Issue Debt: Significant dividend and share repurchase programs are likely to continue pressuring the company to issue debt to avoid repatriation of foreign earnings, which represent the majority of total annual FCF.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Strong commercial adoption of the public cloud and/or open-sourced software materially reduces demand for key Microsoft products, including Windows Server, SQL Server, System Center and others, pressuring overall financial results;
--Penetration of alternative operating system's such as Chrome OS in the PC market and/or market share gains by Apple;
--Greater acceptance of cheaper software applications that compete with Microsoft Office such as Google Apps.
Positive: Upside movement on the ratings is unlikely at this time.
Additional information is available at 'www.fitchratings.com'.
--Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology' (
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Source: Fitch Ratings
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